Democrats Lay Out Their Tax Hike Plans

By Yuval Rosenberg

Happy Monday! We've got a big week ahead as
the Senate returns and House committees look to wrap up their work
on the Democratic budget reconciliation package by Friday. Here's
what's happening.

House Democrats Release Details of Tax Hikes on Wealthy and
Businesses

House Democrats on Monday released a package of revenue
increases that would raise roughly $2.9 trillion over 10 years to
help offset the cost of President Joe Biden’s $3.5 trillion
economic plan.

On paper, the proposal from the tax-writing Ways and Means
Committee would raise about $2.2 trillion through higher taxes,
with a focus on making businesses and wealthy individuals pay more.
The plan also calls for taking steps to reduce drug prices, moves
that are projected to save about $700 billion in federal
spending.

According to a score from the Joint Committee on Taxation
Monday, the proposal would raise slightly less than Democrats
project, about $2.1 trillion over 10 years. Once revenue losses
associated with the many policy-driven tax breaks in the proposal
are taken into account, the plan would provide $871 billion to help
offset the cost of other parts of Biden’s agenda, according to the
JCT.

Here’s a rundown on some of the key tax proposals in the plan
from House Democrats:

The top corporate tax rate would increase to
26.5%, up from the current 21%. The corporate tax would be
graduated, with the top rate applying only to businesses that earn
more than $5 million a year. Corporations making less than $400,000
would see their income tax rate drop to 18%, while those between
the two incomes levels would see no change in rates. The corporate
tax rate provisions would raise $540 billion.

The top individual income tax rate would increase to
39.6%, up from the current 37%, with the top rate kicking in at
an adjusted gross income of $450,000 for married couples. The tax
increase is projected to raise $170 billion.

A new 3% surtax on incomes over $5 million per year would
raise $127 billion.

The top capital gains tax rate would rise to 25%, up from
the current 20%, taking effect on September 13, 2021. This increase
is projected to raise $123 billion.

The net investment income surtax of 3.8% would be
expanded to cover passive income, raising $252 billion.

A $500,000 cap on the pass-through deduction, which
currently applies to the first 20% of qualified business income,
would raise $78 billion.

Reducing the estate state tax exemption, along with other
tweaks to the estate tax, would raise $77 billion.

The minimum tax rate on foreign business incomes would rise
16.6%, up from the current 10.5%. Altogether, changes to the
tax rules for international corporations would raise an estimated
$360 billion.

The IRS would receive $80 billion in additional funding
to beef up enforcement and collections, a move that is projected to
net $120 billion.

In addition to these main components, the proposal from House
Democrats includes a range of other provisions that touch on a
variety of areas, including cryptocurrency, tobacco consumption and
oil production. Together, these provisions would raise nearly $200
billion.

Tax breaks, too: The legislative package also includes
more than $1 trillion in tax breaks that would constitute a major
part of Biden’s domestic agenda. An extension of the child tax
credit, first passed as part of Covid relief and scheduled to
expire at the end of this year, would cost
$556 billion over 10 years. A permanent extension
of the expanded Earned Income Tax Credit would cost $135 billion,
while a permanent extension of the expanded Child and Dependent
Care Tax Credit would cost $98 billion in lost revenues.

Add in a slew of other tax credits touching on infrastructure,
education, housing, retirement savings and renewable energy, and
the total comes to roughly $1.3 trillion. That would leave “about
$943 billion of revenue for other priorities,” the Committee for a
Responsible Federal Budget says.

Taking aim at the 1%: Much of the tax plan focuses on the
wealthy and the businesses that provide a good chunk of their
incomes. The proposal would “overwhelmingly hit the richest 1
percent of Americans with a bevy of new taxes and tax changes
affecting their incomes, investments, businesses, estates,
retirement funds, and other assets,”
says The Washington Post’s Jeff Stein.

Still, the proposal isn’t as far-reaching as some had expected
(see below for more on this). And as
The Wall Street Journal’s Rich Rubin notes, the
proposed taxes would affect business owners who are still involved
with their companies more than passive investors. “The result is
that passive investors who borrow against their assets and don’t
sell would see relatively little change, while active business
owners could see sharp increases in their marginal tax rates,”
Rubin writes.

The less aggressive approach isn’t sitting well with some
critics. “They have a once in a lifetime opportunity to address the
egregious, unfair treatment that the wealthy get in the tax code,
and the committee has refused to do it,” Erica Payne, president and
founder of the Patriotic Millionaires, said, according to
The Hill.

White House expresses support: Spokesman Andrew Bates
told reporters that the proposal “makes significant progress
towards ensuring our economy rewards work and not just wealth by
cutting taxes for middle class families; reforming the tax code to
prevent the offshoring of American jobs; and making sure the
wealthiest Americans and big corporations pay their fair share.”
Bates also said that the plan “meets two core goals the President
laid out at the beginning of this process -- it does not raise
taxes on Americans earning under $400,000 and it repeals the core
elements of the Trump tax giveaways for the wealthy and
corporations that have done nothing to strengthen our country’s
economic health.”

What comes next: The tax hikes laid out in the proposal
can be seen as what Chris Krueger of Cowen Research calls a
“revenue menu” that can be adjusted if and when Democrats need more
money to pay for their programs. In terms of outlays, the tax
breaks function the same way. Together, they give lawmakers a set
of controls or dials that can be turned up or down, depending on
what’s called for.

The Ways and Means Committee will its markup of the
legislation on Tuesday and Wednesday this week. The end result will
be a large part of what the House is offering in the ongoing
negotiation with the Senate and the White House over the
president’s domestic agenda.

What Was Left Out of House Democrats’ Tax Plans

The tax proposals released by House Democrats on Monday had some
notable omissions.

They left out a Biden proposal to end the “step-up
in basis” for inherited assets, a change that would have
taxed
unrealized capital gains before those assets were
passed onto a wealthy person’s heirs.

The new plans also exclude most of the administration’s
proposals to close the tax gap by requiring better information
reporting to the IRS and its proposed limits on tax breaks for
fossil fuel companies. They don’t incorporate the taxes on stock
buybacks and partnerships that key Senate Democrats have
proposed. And they say nothing about the $10,000
limit on the deductibility of state and local taxes. Numerous
Democrats from high-tax states like New York and New Jersey want to
raise or eliminate that cap, which was imposed by the 2017
Republican tax law, with some lawmakers threatening to vote against
any package that doesn’t address the issue. “I have been consistent
for six months: ‘No SALT, no deal’,” Rep. Tom Suozzi (D-NY) said in
a statement Monday.

Dems Say They’ll Address SALT Deduction Cap: Key House
Democrats on Monday vowed that they will still include “meaningful
SALT relief” in their plans. “With Speaker Pelosi, we continue to
work among our colleagues and the Senate to undo the short-sighted
capping of SALT by Republicans. We are committed to enacting a law
that will include meaningful SALT relief that is so essential to
our middle-class communities and we are working daily toward that
goal,” House Ways and Means Chairman Richard Neal (D-MA), Oversight
Subcommittee Chairman Bill Pascrell, Jr. (D-NJ), and Suozzi said in
a joint statement.

A Tax Break for the Rich: Budget hawks and some
progressive Democrats oppose changing the cap, arguing that the
benefit of such a change will primarily go to high-income
households — the same people Democrats are trying to tax more. The
Tax Policy Center says that 96% of the benefit of repealing the
$10,000 cap would flow to the top 20% of income earners. And
restoring the full deduction would cost $88.7 billion in 2021,
according to figures from the Joint Committee on Taxation cited by
Bloomberg.

Step-Up in Basis Unlikely, but Not Dead Yet: The
proposals released Monday could still change substantially as
Democrats look to secure the votes they’ll need in both chambers of
Congress. Senate Finance Committee Chair Ron Wyden (D-OR) indicated
Monday that he may not go along with the House plan on capital
gains and inherited assets. “It’s important to address the fact
that billionaire heirs may never pay tax on billions in stock
gains,” he said. “The nurses, firefighters, and teachers who pay
their taxes with every paycheck know the system is broken when
billionaire heirs never pay tax on billions in stock gains.”

And a step-up in basis, or lack of one, could change the revenue
outlook for capital gains taxes more broadly. “If Democrats drop
the plan to treat death as a taxable event for capital gains for
individuals with real-estate and other asset appreciation over $1
million, then a capital gains rate above 28% would likely cost the
federal government money,” Bloomberg’s Colin Wilhelm
reported late last week.

The Big Winners in the Post-9/11 Military Spending Surge

The Pentagon has spent more than $14 trillion since the start of
the war in Afghanistan, and up to half of that money went to
for-profit military contractors, according to a
study released Monday by Brown University’s Costs of War
project and the Center for International Policy.

“Corporations large and small have been, by far, the largest
beneficiaries of the post-9/11 surge in military spending,” William
D. Hartung, the author of the study, writes. “Some of these
corporations earned profits that are widely considered legitimate.
Other profits were the consequence of questionable or corrupt
business practices that amount to waste, fraud, abuse,
price-gouging or profiteering.”

The paper notes that between a quarter and a third of all
Pentagon contracts in recent years have gone to five major weapons
contractors: Lockheed Martin, Boeing, General Dynamics, Raytheon
and Northrop Grumman. “The $75 billion in Pentagon contracts
received by Lockheed Martin in fiscal year 2020 is well over one
and one-half times the entire budget for the State Department and
Agency for International Development for that year, which totaled
$44 billion,” the paper notes.

Why it matters: Hartung told the
Associated Press that relying on private companies
was problematic for reasons beyond just the money. “If it were only
the money, that would be outrageous enough,” he said of instances
where the Pentagon’s reliance on contractors backfired. “But the
fact it undermined the mission and put troops at risk is even more
outrageous.”

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